Creating a project budget is one of the most challenging tasks the project manager faces during the planning process. The ability to create an effective project budget is one of the essential abilities of any project manager, but this can be a daunting task, especially for new managers.
The project budget is the total projected cost to complete a project over a specific time period to achieve specific results. It is the detailed estimate of all the costs involved to complete the project’s tasks.
The good news is that a good and efficient budget can be easily created, especially when you know what should be included. So what should be included in the budget?
Direct costs are the expenditures that are directly related to the project and can be identified, measured, and controlled with precision. In a project, direct costs refer to the material and manpower that are applied directly and exclusively in the execution of the project in question.
An example of a direct cost would be the hiring of outsourced labor specifically for the execution of a project activity.
Indirect costs are the expenditures that help the company carry out its daily activities, but cannot be easily traced. As such, these costs cannot be associated with a specific project or service.
Examples of indirect costs include:
- Water, electricity, telephone, internet
- Security and cleaning services
- Equipment maintenance
Fixed and variable costs
Fixed costs are those that do not change in value, regardless of the duration of the project. Let’s imagine that your company is doing a project on a public road and would like to do an advertising campaign publicizing the benefits of the project.
Your costs associated with this advertising campaign is a fixed cost, as it will not change if there is a delay in the delivery of the work.
On the other hand, variable costs will vary according to the units used during the project. Using the same example of the work on a public road, if your company needs to rent a machine to execute part of the work, and there is a delay, the expense for renting that machine will increase.
By the same token, if the work is completed before the scheduled deadline, your costs associated with renting the machine will decrease.
Labor and material
The cost of labor is the sum of all salaries paid to employees involved in the project, plus any benefits and taxes paid by the employer. These costs can also be divided and classified into direct and indirect costs.
The cost of materials refers to any money invested in raw material for the execution of the project. In a construction project for a building, this may include cement, bricks, hydraulic material, electrical material etc.
The cost of material plus the cost of labor will help you determine the total cost to execute the project.
If you are planning a project that requires some type of travel, this should also be included in your budget planning. These costs are those associated with any trip where the objective is directly linked to project activities.
Examples of travel costs include: air travel and local transportation, car rentals, lodging and meals (during the trip). But be careful! Extravagant, luxurious and personal expenses should not be included.
In this case, it is always prudent to impose a daily spending limit.
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